Family-owned businesses have many advantages over publicly traded companies. They tend to make decisions more quickly, do not have to deal with lengthy decision-making processes, and are generally more creative.
However, they have at least one significant disadvantage compared to companies, which are usually large. According to a major study by the Family Business Foundation, family businesses—regardless of their size—face a higher risk of insolvency and, consequently, of having to file for bankruptcy.
According to the authors, the credit ratings of family-owned and non-family-owned companies do not actually differ on average. Companies based in Germany with ten or more employees are, on a median basis, rated as having good creditworthiness, while smaller companies receive a medium credit rating.
And yet: The proportion of companies that ceased payments between 2005 and 2015 is higher among family-owned businesses—regardless of the number of employees—than among non-family-owned businesses. Neither the legal form nor the industry has any impact on this correlation.
On the one hand, this finding might come as a surprise. After all, family-owned firms, with their generally long-term business strategies, are often held up as models of sound financial management. More important in this context, however, is the fact that the focus on the family—sometimes as the sole source of capital—can hinder the broadening of the capital base—and thus also the ability to obtain loans from banks. Many family-owned businesses are known for being reluctant to bring in external investors. The reason: They do not want others meddling in their business. But this deters banks from providing debt financing. A dangerous combination in a financial crisis. The study sums it up: “As ownership diversity increases, the risk of insolvency decreases.”
Another noteworthy finding of the study: The risk of insolvency also depends on population density. For example, the proportion of family-owned businesses is lower in cities than in less densely populated areas. At the same time, the risk of insolvency for family-owned businesses in cities is disproportionately high compared to non-family-owned businesses. The authors’ explanation: Competition is significantly fiercer in densely populated regions than in less populated areas. Consequently, the risks for less well-protected companies would rise more sharply than for others. Specifically, family-owned businesses in metropolitan areas such as Berlin, Nuremberg, and Magdeburg, as well as in metropolitan regions like the Rhine-Main area and the Ruhr region, face a higher risk of insolvency.
Tip: Four Reasons to Buy an Insolvent Company
In general, there are differences between industries. Capital- and labor-intensive industrial sectors such as manufacturing, mining, and energy, water supply, and waste management have lower default rates than others. In retail and hospitality, competitive pressure is generally more intense, and thus the default risks are relatively highest.
